Digital Transformation leads to better profits for 80 percent of companies that pursue it, reports SAP Center for Business Insight and Oxford Economics. In fact, 31 percent of decision makers said investment in employees’ digital skills would be key in increasing revenue in the coming years, and some 80 percent of companies that have undergone digital transformation efforts reported increased profitability, compared to 53 percent of other companies.
While digital transformation is a term most credit union executives hear often, it can mean different things to different people. With new fintech innovations hitting the headlines on a daily basis, discerning which technologies to embrace – and which to simply watch in the near term – can be a challenge.
Consider blockchain technology as a case in point.
Following Bitcoin’s wild ups and downs on Wall Street, blockchain technology is fast emerging as a fintech disruptor that promises to become a household name – but for many reasons, not all financial-related.
In fact, according to alliedmarketresearch.com, the global blockchain distributed ledger market is growing at an annual rate of 57.6 percent and will reach $5.43 billion by 2023.
However, while fintech leaders and start-ups alike scramble to monetize what they see as the next big thing, blockchain’s greatest potential may reside outside our industry altogether.
Here is what we have learned.
What is a Blockchain?
To truly understand blockchain technology, one must understand its underlying distributed ledger architecture, says Jeff Falk, director – payments product management for CO-OP Financial Services.
“At its highest level, a distributed ledger is made up of digital data that is replicated, shared, secured and synchronized across multiple entities that could be physical sites, financial institutions or countries,” he said. “Blockchains digitally record data in blocks, with each block interconnected to the block before it like links in a chain.”
According to Tiana Laurence, chief marketing officer for Factom, Inc., not all blockchains work the same. “There are different types of blockchains for different applications,” she said. “Bitcoin and other cryptocurrencies represent just one use case.”
In fact, Falk says, any type of asset could be tracked through a blockchain. “It could be gold, diamonds and even food. There are companies using the technology to track how food travels through the supply chain to pinpoint any source of contamination.”
He adds that healthcare and insurance are very big areas of focus for companies like IBM and Microsoft. “Ultimately, blockchain technology will change the way we approach cancer research because we will be able to automate patient data consent and sharing,” said Falk.
Creating Digital Identities
One potential benefit of blockchain technology is its ability to verify an individual’s identity digitally.
“Identity can mean many different things – and can be applied to people and documents,” said Laurence, adding that there are RFID and NFC chips available today that incorporate the technology and can be secured on paper documents to give them digital properties.
“The feeder document can then be scanned at the DMV, for example, verifying that the document is authentic, showing who its creators were and how it has changed over time,” she said.
Blockchain is also being considered by global entities, Falk notes, to benefit developing countries.
“The United Nations is exploring the technology,” he said. “There are political and cultural nuances involved because in some countries the ability to have an identity and prove ownership, for example, of a farm or a horse is not clear.”
Future Payments Will Be Smarter
While the applications for blockchain technology are far-reaching, Falk advises credit unions to focus on how the innovation could eventually drive value for members.
“A blockchain could transform how we track the ownership of automobile titles,” he said. “Consider that the way we do this today is not very efficient, and extremely paper- and image-heavy with physical documentation.”
He points to same-day ACH as another potential application. “Faster payments, transactions and reconciliations are all potential blockchain benefits,” said Falk.
Smart contracts also hold promise for credit unions. “Today it costs around $7,000 to originate a new mortgage,” said Laurence. “We need to ask, ‘Could the technology better facilitate and manage the process to save the member money?’”
Falk adds, “There are a lot of intermediaries in the way we exchange anything today. The introduction of blockchains could reduce the number of intermediaries, thereby reducing costs and simplifying processes.”
The Road Ahead
Operationalizing the technology presents challenges, though. “There is an expanse of long-term legacy infrastructure in big banks and places like the Fed that didn’t anticipate blockchains,” said Falk. “So how do they go in, change code and reinvent it?”
Laurence adds, “A blockchain doesn’t have to be another data silo for credit unions, and it is not a complete solution. But the future potential for real value is there. If a credit union could use a blockchain to originate home mortgages and shave $8,000 off the cost of a mortgage, for a lot of people that is a down payment on a house.”
CO-OP is continuing to monitor emerging technologies like blockchain to determine their future use cases for credit unions. For more information and insights on how to build a strategy towards digital transformation, download our Digital Transformation Research Report.